October 6, 2008

84 comments:

Congress just made everything worse by giving goodies away and continuing to insist on social engineering. Instead of addressing the financial problems that they created over the years in a simple and efficient way, they just gummed it up even more....and the markets know it.

"This crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center," as this oped from today's WSJ says.

In the future, our grandkids will ask, "Grandpa, was it true that in the 1990s you could buy a house with no money and a car with no money and get those TV things and vacations and pay for it, like, never?"

Buffett was chuckling on Charlie Rose last week. He couldn't be happier. Says the downturn might last last five years. He supports Obama. Why? Because he knows the kid can be played.

Then there was the interview with the 94-year-old investment whiz Mr. Glickenhaus who was on the Street in 1929: "We've gotten soft in the United States, politically, economically and in every way. We've had so much prosperity that we can't compete any more. Those days are gone, except in small companies. In things like autos -- those days are gone," said Mr. Glickenhaus. He also has a five-year horizon until a turnaround.

There is no good news. It was a turkey of a bill loaded with pork to induce nay votes into becoming yea votes. The only reason, the only reason, to have ever been for it was hoping for the off-chance that it would reassure investors domestic and foreign that the US banking system and overall economy economy was righted and otherwise in good hands. It didn't work.

It's times like these I harkin back to the words of wisdom of George Baily.

Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying! And why? Because we're panicky and he's not. That's why. He's picking up some bargains. Now, we can get through this thing all right. We've got to stick together, though. We've got to have faith in each other.

The sell off has little to do with the "financial crisis." The market is selling off in response to a pending global recession. It will recover within 6 months.

Obama is a lucky son o bitch to have this happen a month before the election.

Although, Obama would be served better by a sharp recession followed by recover like we had in 1982. He would be less served by a shallow longer recession, which is more likely to occur. That longer recession is likely to wipe out the Dems majority in Congress.

It's really not about "us" anymore. The Treasury and the Fed will keep the printing presses churning away for as long as it takes to resolve the liquidity crisis here. The main problem now is overseas. The EU Central Bank was doing the opposite, raising rates and fighting inflation even though the main problem was turmoil and rapid deflation in dollar-denominated credit markets. Not a good move by our Europeans friends. Add to that a financial sector that is less transparent that the US banking system, and much more under the control of governments and politicians. No one really knows the extent of the problem in the EU.

Making it all much worse is the inherent weakness of the EU set-up. If you think the finger-pointing between House Dems and Reps here was getting in the way of a plan, that's nothing compared to the friction between the Germans and the Italians. The national governments in the EU are pursuing various rescue plans (e.g., Belgium and the Netherlands with Fortis, Ireland and now Germany with government guarantees of deposits, the UK with its bank rescue plans), but the EU Central Bank controls the euro. At least here the Fed and the Treasury could pursue sensible alternatives (as they did with Bear S, AIG, etc.), even if the political system was temporarily paralyzed. The EU Central Bank is much more constrained, particularly where the national gov'ts that control it are more focused on the homefront than they are on the political fiction called Europe.

"American people—Joe Six Pack, hockey moms across the nation, I think we need to band together and say never again.

Never will we be exploited and taken advantage of again by those who are managing our money and loaning us these dollars.

We need to make sure that we demand from the federal government strict oversight of those entities in charge of our investments and our savings.

We need also to not get ourselves in debt. Let's do what our parents told us before we probably even got that first credit card. Don't live outside of our means. We need to make sure that as individuals we're taking personal responsibility through all of this.

It's not the American peoples fault that the economy is hurting like it is, but we have an opportunity to learn a heck of a lot of good lessons through this and say never again will we be taken advantage of."

That's the closest thing you'll hear to Sam Bailey on today's national stage.

The bailout was to save the economy not the markets. It will take time for the Fed to ramp up and start buying bad assets from banks. Until then the economy will continue to founder because banks will be unable or reluctant to extend credit.

Just as markets can become "irrationally exuberant" they can also become "irrationally pessimistic." Trying to make a direct correlation between markets and economies is unwise.

There is also a basic underlying principle at work here. Government can't spend it's way to a good economy. Tax dollars come from economic growth. Spending tax dollars to achieve economic growth is like pushing on a rope.

A good economy can be encouraged through intelligent policies and effective incentives. But ultimately economies will march to their own drum. Intervention, too much and too little, will distort them and cause the inevitable business cycles to swing to extremes. What we are seeing now is an economy that was distorted through poorly conceived and executed policies resetting itself.

2) The specifics of throwing the money still haven't been figured out.

3) We have a world problem, we need a stronger, coordinated world reaction. Did any of the P candidates mention this a couple weeks ago? [BHO]

P.S.The "This American Life" radio show for this week was very informative (and mostly correct) as it explained the current mess. I think the podcast will be available today. This should be mandatory listening.

DBQ,

The gummed markets?

Do you have no understanding of the OTC products? We could have used a million tons of gum.

And, are you one of those silly folks who thinks letting corporations hide their toxic assets is the solution?

Put more simply for you: company A has good assets, but company B has bad assets.

1) A is at a relative disadvantage if B can hide it's bad assets. This is destructive to free markets.

2) B will have more access to capital (or control of capital) through loans, debt, equity, leverage, and derivatives than may be prudent. Destructive to free markets.

3) The B management team would be prudent (in the short term) to not liquidate the junk because doing so would expose the hidden junk, and their access to capital would be hurt. Then B would move along until an unexpected (to those not on the board) blowup occurs. (And, this isn't theoretical: this is what happens, hence the change in the rules.)

Maybe you think the CRA is the problem. Funny stuff.

Electric citizen,

Are you ready to give up on trickle down? Or, are you still claiming that we need more tax cuts for the rich?

Why did Americans get hooked on debt? Could it be partly a result of median incomes being approximately flat for a decade (when adjusted for inflation)? Could it be that it's not helpful to increasingly isolate the benefits of our growth to the rich?

Our economy has been growing, but middle income folks haven't been growing = unsustainable.

You're right Doyle. For those of us who lived within our means, didn't buy a house we could not afford and didn't loan out money to people who could not pay it back we simply see it as throwing money down the toilet.

As usual, those who play by the rules end up having to pay for those who didn't.

I don't think DBQ's interpretation is quite right. That is, I don't think this stock market crash can be attributed to the bailout bill per se. In the last few days, the global scope of the credit crunch has become more and more apparent---as has the inability of foreign governments to deal with it.

I think markets are realizing that the bailout is tantamount to throwing a bucket of something on a warehouse fire. You might think that the "something" is water, or gasoline---and on a small fire, that distinction might matter. But now it's too small to do squat either way.

However, Finance Minister Peer Steinbrueck made clear that Germany does not envision making its move as part of a U.S.-style bailout plan for all of Europe. He said he and Chancellor Angela Merkel agree that the German government must remain the sole "master of the process."

I think markets are realizing that the bailout is tantamount to throwing a bucket of something on a warehouse fire.

Yes. Too little too late. If the liquidity could be brought to the financial markets in a swift manner it might help.

Liquidity is a global crisis and the markets realize that the infusion of cash with this latest pork laden bail out bill is not going to be coming soon. It is quite apparent that Congress isn't acting in good faith or that they appreciate the global depth of the problem because they insist on STILL including measures that are part of the root problem.

No confidence in the effectiveness of the cobbled together plan from Congress and no confidence world wide in other banking/financial systems is one reason for the sell off today.

The Federal Reserve is attempting to boost liquidity. "The Fed said it would increase the size of its key TAF lending facility to commercial banks, pay interest on excess reserves to smooth liquidity operations, and allow money market funds to borrow via banks to fund their holdings of commercial paper." If the other 'central' banks also work together it might help.

So, hopefully, this global sell off of equities and the financial instability of banks world wide is a temporary panic. It still may be a month or more before the 700B begins to be released.

"After securing congressional approval for the rescue plan on Friday afternoon, Hank Paulson, Treasury secretary, vowed to “move rapidly to implement the new authorities, but also methodically” and insisted that “transparency” would be important throughout the process.

The core of the Treasury plan – a reverse-auction mechanism for the acquisition of the troubled assets from a range of financial institutions – will not function until next month at the earliest.

Over the weekend, Treasury officials worked on the release early this week of criteria for the hiring of several large asset management groups that will be charged with managing the portfolio of assets purchased by the government.

The groups will be expected to turn round their applications quickly so the Treasury can start evaluating the proposals by the end of the week.

Asset purchases by the Treasury will focus on securities backed by home mortgages. The Treasury was also granted the power to purchase other assets if it deemed it necessary. "

Clearly, God is repaying the Europeans for their previous arrogance. Their financial crisis now appears worse than ours and will probably stay that way. Certainly their markets are doing much worse than ours today.

That's why I like God, because he doesn't always punish the wicked, but he always, always humbles the proud.

The saying used to be that a bull market is not the same as being smart. There should be a converse statement to cover the present situation, but I do not know one....These Dow related mood swings are a bitch. I own my own home and live within my income. My standard of living has not yet been affected, but the smile has certainly been wiped off my face....I think all that is going on is prologue to the Great Capitulation Day, i.e. the crash....I suppose in the long run things will work themselves out, but, as Keynes noted in a somewhat different context, in the long run we are all dead.

Moderator Gwen Ifill: The next question is…about the subprime lending meltdown. Who do you think was at fault? I start with you, Gov. Palin. Was it the greedy lenders? Was it the risky home buyers who shouldn’t have been buying a home in the first place? And what should you be doing about it?

Palin: Darn right it was the predator lenders, who tried to talk Americans into thinking that it was smart to buy a $300,000 house if we could only afford a $100,000 house. There was deception there, and there was greed and there is corruption on Wall Street. And we need to stop that.

[Stee Verdon]Let me see, the lender was greedy. Okay sure, I buy that. He (or she) wanted that nice commission. But, why isn’t the person buying the house greedy? In Palin’s example the buyer is getting 3 times as much home as he can really afford. Isn’t that the definition of greed?

Palin [cont'd]: One thing that Americans do at this time, also, though, is let’s commit ourselves, just everyday American people, Joe Six Pack, hockey moms across the nation, I think we need to band together and say never again. Never will we be exploited and taken advantage of again by those who are managing our money and loaning us these dollars.

Translation: Everyday American people, Joe Six Pack, hockey mom’s, et. al. are stooopid. They didn’t realize that they couldn’t afford a house that was 3x what they could afford.

Palin:We need to make sure that we demand from the federal government strict oversight of those entities in charge of our investments and our savings and we need also to not get ourselves in debt.

[Verdon}Again, people are too stooopid to oversee their own investments and savings. Government has to do it for them.

Palin:Let’s do what our parents told us before we probably even got that first credit card. Don’t live outside of our means.

[Verdon] What? Did she just suddenly forget what she said second ago? The people decided to live beyond their means and it wasn’t their fault. So what if I get a credit card run it up to the max and can’t pay for it. It was the fault of those predatory credit card companies that made me charge things!

Palin;We need to make sure that as individuals we’re taking personal responsibility through all of this.

[Verdon]Uhhh…buuuuut…didn’t she just say we need government to do this?

Sarah Palin is like some sort of random platitude generator. Toss a question at her and soon she’ll start spouting an incoherent stream of platitudes.

Oh well so much for the conservative/Republican belief in free markets. We are all big government nanny-staters now.

madawaskan said... Palin: Darn right it was the predator lenders, who tried to talk Americans into thinking that it was smart to buy a $300,000 house if we could only afford a $100,000 house. There was deception there, and there was greed and there is corruption on Wall Street. And we need to stop that.

I work in the real estate industry, and will back Palin up on this, sort of.

It was not the lenders who were greedy as much as it was the mortgage brokers. They had no risk- just generate the loan and sell it off; the actual lender takes the risk.

By the time the loan goes south the broker is with another lender or gone to the Bahamas with his hefty percentage.

It was the brokers, not Countrywide, who would convince the buyer he was able to get a 300k loan on a 40k annual salary. Who is taught economics anymore to even know better?

You choose your real estate agent because you trusted them, and they either choose for the buyer or lead the buyer to a broker they trusted as well.

Who knows enough about the market to do their own investing? Don't we just make a few basic choices for our 401k and let the fund managers do the actual day-in/day-out trading?

Most buyers TRUSTED their mortgage broker not to screw them; it is the brokers who are/were the real predatory lenders.

madawaskan, I could give you some horror stories (like a development is So Cal where the lots sold for $200k a few years ago and $2000 now, or developments out west where homes have $600k mortgages and $300k values.

Yes there is a bottom; the question is not where the bottom is, but what percentage of the loan value IS the bottom?

My biggest fear was a complete lack of money to lend. My home area (just south of Cincinnati) was not hit with the massive equity increases of other places, but if the only potential buyers are those with hard cash, the value of my home just hit the skids, and although my mortgage is now only about 50% of the value of my home, how long would it be in a cash only/Carter era interst rate market before I was also upside down?

As far as the shell game, how's this for 'Find the Pea"?

A broker would write a loan and sell it to Countrywide the same day, who would them sell it to Freddie or Fannie almost immediately as well.

Dust Bunny Queen: Instead of addressing the financial problems that they created over the years in a simple and efficient way, they just gummed it up even more....and the markets know it.

Congress threw $700B of our money at the symptoms of their social engineering mistakes in the hopes of keeping the symptoms off of the front page of our newspapers and the nightly news, at least until after the November election.

And even then, assuming the Democrats still control congress, there will be no congressional investigations into the matter because they've already decided who the guilty party is - George Bush.

So nothing will change. Indeed, the Democrats don't want anything to change. They like the gravy train they've set up, and now that gravy train is getting a cash infusion of $700B, just in time to have some of it funneled back into their re-election coffers.

If things get bad enough, opinion could switch McCain's way where his being 72 years old is a plus. McCain has lived through numerous nasty recessions and knows what it is like. In contrast, Obama has never experienced this sort of loss. Obama has never really owned a stock before recently. How can Obama relate to recession. He was in law school during the last bad one we had from 1990-91. He was in College during the bad one we had in 1982.

There's a cause of market turmoil that's been missed in the comments so far.

Wall Street is 'pricing in' an Obama Administration. They're getting ahead of the curve, as reports of the near 'certainty' of an Obama Administration continue to circulate in the press, the market continues to get worse.

Traders trade on future expectations more than they do current circumstances, and the prospect of an Obama Administration coupled with a strong majority in the House, and a fillibuster proof Democratic Senate is enough to drive the market down another 1500 points from where it is now.

The last two times we had liberals running the House and Senate along with a Democratic President was Carter's Administration (look how the market and economy performed in his years in office) and before that you have to go all the way back to FDR (whose policies made the depression worse, not better, a recovery that might have began in 34-35 didn't happen until WWII because of his intervention into the economy).

It's not the bailout, it's not Europe, it's President Obama and an unfettered Democratic legislature that's driving this market down.

Nice 9:37AM comment by Electric Citizen.---------------Hoosier Daddy - For those of us who lived within our means, didn't buy a house we could not afford and didn't loan out money to people who could not pay it back we simply see it as throwing money down the toilet.

As usual, those who play by the rules end up having to pay for those who didn't.

And the anger in those like Hoosier, which is me and the traditional Republicans - is directed at the Republican failure of Reagan voodoo economics, as much as it is directed at Barney Franks and his ilk for trying to match uncreditworthy bums with 400K homes...

It's just that many "play by the rules" Republicans do not yet appreciate how badly they were raped by ideologically-driven deregulators and "trickledown" and "deficits don't matter" bribed and corrupted Republicans....---------------

But enough are pissed at Republicans and Wall Street that it looks like Obama, as unqualified as he is, is well on his way to being elected.

Better an outsider than a guy who loved to talk about his 20 and 30 year long "deep friendships" with fellow Senators for Life, and other DC insiders. Grandpa gets to go back to his "dear friends" in DC like John Kerry, Arlen Spector, Ted Stevens, Robert Byrd - and await the end days of his "special dear friend Teddy"..and give going-away Parties for his close, valued Neocon and Lobbyist pals of decades...

As for the hapless Bush II, Harry Truman is chortling in Purgatory along with Dick Nixon and the bound for Purgatory Jimmy Carter...It looks like Dubya will leave as the most reviled and discredited President ever, with the lowest poll numbers.Small consolation to the rest of us - unless you happen to have a golden parachute or put your life savings all into gold 6 months ago...

That there market thingy is headin' south let me tell ya', like a wounded elk ya'betcha.

Well depending on one's personal situation, this is a perfect time to go bargain shopping. For those who think it's 1929 again, I suggest a history primer.

Warren Buffett made the deal of a lifetime when he went in and scooped up a ton of preferred GE stock. While he may be a liberal's capitalist, he's still a capitalist and if he's buying rather than pissing down his leg like most are right now that should tell you something about the irrational fear out there.

If you're still looking at 10-20 years before retirement, I would be maxing that 401K contribution right now.

Well I'll be damned, there must have been a lot of shorts riding the crash down that want to cover now, or a lot of folks who think the US has suffered enough. We might very well close above 10K, or darn near it.

Blake; I can't say too much because there is a client involved, but the lots are in the San Deigo area, east of the city around a lake.

The $2000 was a bit of an exageration, but we are transferring a number of them for about $10k each in a bulk deal, which, although not as low as I originally stated, are still quite a bath for the lender, which was my point in the first place.

I make a pretty good living. Granted, my lifestyle is profligate, what with the innumerable children (or at least they seem that way), but even factoring all that in, I couldn't see how anyone could afford to buy a house in L.A.

Yet they kept on getting bought.

They've only dropped off about 20% or so. I'm expecting another 50%. If I have a job and some money, I'll be buyin'...

Approximately 30 times last month we handled a sale in CA worth over half a million, and 90% were lender deals. Some were taking advantage of the expiring Nehamiah program, and a few were cash (CASH!!!); I just keep wondering where the money was coming from, and not being physically in the CA market if a not sure if these were deals or not, but suspect they were near market.

I own my own home and live within my income. My standard of living has not yet been affected, but the smile has certainly been wiped off my face....

Thinking you can be affected, is almost as bad as actually being affected. If not as bad, at least as nerve-wracking.

It's like a slow-motion car crash, as you watch a car spinning right to where your stopped car is, and all you can do is mentally wonder just how bad the damage will be, if you'll need to miss work, how long the car will take to get fixed, and, well, it's just not a fun thing to be in any kind of crash.